What is the Alternative Minimum Tax?

Learn about the basics of this obscure tax system, common triggers that result in this tax, and ways to reduce your tax liability when the time comes

Tax Time The contents of this page and website are for information purposes only. Any result from our tools, including the IPO Calculator, AMT Calculator and ISO Planner is only an estimation based on the inputs provided. It is not intended to be financial, tax, or investment advice. Please seek a duly licensed professional.

So, what is it?

The Alternative Minimum Tax (AMT) is a separate tax system that you have to calculate in parallel to your regular income tax. Each system has a slightly different set of rules, eligible deductions, and tax brackets. Learn more about the differences between the AMT and Regular Income tax system here

Every year whether you know it or not, your tax filing program actually calculates both your regular income tax and alternative minimum tax. You only end up paying the higher of the two.

For the vast majority of people and for most of your tax filing years, your regular income tax is far greater, so you will not need to worry about calculating the AMT. This is likely why you may not have heard about the AMT until now.

With that being said, it is important to keep in mind that some of the most common cases for when the AMT might trigger:

Exercising Incentive Stock Options (ISOs)

This is by far the most common reason why AMT is triggered, and what this website focuses on. If you exercise ISOs received from your employer and do not sell them in the same calendar year, the spread of your exercise (difference between fair market value and strike price at time of exercise) factors into the AMT calculation and may make you eligible for AMT. We’ll go into how to calculate the AMT here.

I will reiterate, because it is often lost and not mentioned. If you exercise ISOs and sell those stocks in the same calendar year, you will not need to pay AMT on these stock options.

However, as they say, there’s no free lunch. Doing the above would result in a Disqualifying Disposition of ISOs, the gain is still factored into a combination of earned ‘income’ (which will appear on your company’s W2) and short term capital gains. You can learn more about differences between qualifying or disqualifying dispositions on ISO sales.

All of the above is why, especially in the case of exercising ISO, planning when to exercise and how much you can exercise is an often overlooked and significant money saving technique. You could literally save thousands of dollars in taxes with just a little bit of planning. Luckily, we created a tool to for ISO stock option tax planning with our AMT Calculator AMT Calculator

Realizing a large long term capital gain

Although your long term capital gain will still be taxed normally at favorable tax rates, realizing too much may make you ineligible for the AMT exemption, which could ultimately cause you to have to pay AMT. In more specific terms, long term capital gains are still included in your Adjusted Gross Income (AGI) calculation, which affects the base number used in calculating your Alternative Minimum Tax. So although it won’t be a part of your taxable income, it does affect the amount getting taxed. You can read more about how the AMT is calculated in its entirety here.

Making too much money

And lastly, similar to the above, if your ordinary income exceeds the phase-out thresholds for the AMT specific deductions, it may make you liable to pay the alternative minimum tax. Rest assured, this won’t affect the majority of folks, as the AMT deduction phase out threshold starts at $523,600 for single filers and $1,047,200 for married.

Wow, that was a mouthful. Luckily, you can forget the headache, and let our AMT Calculator AMT Calculator do all the work for you!